Finland Drops Debt Target Amid Austerity Backlash: Nordic Credit

Finland’s government is abandoning a target to halt debt growth by the end of its term next year.

Prime Minister Jyrki Katainen, who heads a six-party coalition, joined Finance Minister Jutta Urpilainen in signaling the government can no longer commit to the second of two policy targets it had previously defended against austerity critics. The shift means the government is poised to spread 3 billion euros ($4.1 billion) of measures needed to rein in the budget over several years, allowing debt growth to continue.

Finland, which boasts the euro area’s only remaining stable AAA credit rating, has suffered two years of economic contraction. The nation, still reeling from the decline of a technology industry led by Nokia Oyj, has lost competitiveness against trade partners in a development that’s stalled exports and killed jobs.

“The discussion is missing a plan on how to support growth,” Timo Vesala, an economist at LaehiTapiola Asset Management in Espoo, Finland, said by phone. “Fewer spending cuts or omitting some tax increases isn’t a growth strategy.”

The nation’s economic plight has eroded public finances. Still, Katainen defended his government’s austerity policies as key to protecting Finland’s top credit grade and preventing a rise in borrowing costs.

Paul Krugman

Austerity critics, including Nobel Laureate Paul Krugman, argue the policies have exacerbated Finland’s recession. Krugman said last month the northernmost euro member is in a “depressed” state as government measures undermine demand.

The Organization for Economic Cooperation and Development today cut its forecast for Finnish economic growth to 1.1 percent from 1.3 percent projected in November. The economy will expand 1.9 percent next year, it said. The jobless rate will peak at 8.3 percent in 2014 before falling to 8 percent in 2015, the Paris-based institution said.

Finland’s government can stretch any new austerity measures over a longer time period, provided it “explains very well where this is going” and how it plans to “get back to the very sound and solid fiscal position,” OECD chief Angel Gurria said in Helsinki today. “You should use this space.”

Sliding Popularity

The ruling coalition has watched its popularity slide in polls. Urpilainen’s Social Democrats trailed the opposition Center Party by 6.2 percentage points in a Helsingin Sanomat poll today. Katainen’s National Coalition was 3.2 percentage points behind the Center Party.

The government is predicting a central government budget deficit of 3.2 percent of gross domestic product for next year, in contrast to a prior 1 percent target. The general government budget gap has remained within the 3 percent European Union rule since at least 1996, and will narrow to 2 percent next year.

Further delays in pushing through budget cuts will only undermine debt targets, according to Vesala.

Finland’s 3 billion-euro austerity target is based on a forecast by the Finance Ministry of how much budget adjustment is needed for debt as a percentage of gross domestic product to begin falling.

“My perception is that 3 billion euros is not enough,” Vesala said. “It’s unlikely that the growth of indebtedness to GDP would stop there. I don’t believe that nominal GDP growth will accelerate enough.”

‘Too Slowly’

Beset by Europe’s fastest-aging population, the government is trying to push through structural changes to pensions and health-care spending to ensure public finances remain sustainable in the long term. The 9 billion-euro plan agreed in November will be sent to parliament gradually. Changes to municipal structures and local governments’ role in social services are still being drafted.

“Public sector reforms have proceeded much too slowly,” he said. “The measures included in the government’s reform package are all very good, I don’t think there’s anything essential missing. They just need to be implemented, and that’s what’s proving troublesome.”

The 9 billion-euro package “will take time to implement,” Urpilainen said today.

“To preserve growth, we must consider carefully how much cuts and tax increases are implemented next year,” she said. “The Finnish government is committed to turn the debt-to-GDP ratio downward,” Urpilainen said, without specifying a timeframe.

‘Large Clout’

More austerity, and its timing, puts pressure on the coalition’s junior partners. The Left Alliance, which has 12 lawmakers supporting the government in the 200-member legislature, voted narrowly in November against quitting the coalition amid a protest against budget cuts.

“Small parties command exceptionally large clout,” said Erkka Railo, a researcher at the Center for Parliamentary Studies at the University of Turku. “Their power originates from the threat of leaving the government. Both the Green League and the Left Alliance have fewer lawmakers than before, but more power.”

The departure of either the Left Alliance of the Greens would leave the government with the backing of about 112 lawmakers, while both parties’ departure would shrink its support to 102. Finland last had a minority government in 1977 and it ruled for less than a year. Urpilainen is also facing dissension within her Social Democratic Party’s ranks after Antti Rinne, who heads trade union Pro, said he will run against her at the party gathering in May.

Katainen signaled Feb. 7 the government may also renegotiate a plan to split austerity measures into equal parts of tax increases and spending cuts. Katainen favors reducing expenditure, in contrast to Urpilainen’s party’s preferences.

“Katainen has had difficulties in putting his foot down as the head of the government,” Railo said. “He favors discussion, perhaps even a bit too much.”

Before it's here, it's on the Bloomberg Terminal.